Tom Fitzmyers - Vice Chairman Karen Colonias - President and Chief Executive Officer Brian Magstadt - Chief Financial Officer, Treasurer and Secretary

Daniel Moore - CJS Securities Tim Lange - Baird Steve Chercover - Davidson

Thanks everyone. Good morning and welcome to Simpson Manufacturing Company’s first quarter 2017 earnings call.

Our earnings press release was issued yesterday after the close of the market and is available on our website at simpsonmfg.com. Today’s call is also being webcast and a replay of that webcast will be available on our website.

As usual, joining me for today’s call are Karen Colonias, Simpson’s CEO; and Brian Magstadt, Simpson’s CFO. I will start, followed by Karen and then Brian, and then we will be delighted to take your questions.

Consolidated net sales grew up 10% year-over-year to nearly $220 million primarily due to our recent acquisitions driving growth in Europe and mix results in North America. North America’s historic [indiscernible] in the west hampered sales, but the segment managed to grow 5% over last year based on increased housing starts, construction activity in areas outside the West as well as added revenue from our acquisition.

Our price increase in the U.S. that took effect December 1 further contributed to the growth.

Our European sales were up 45% compared to last year’s Q1 mostly due to revenue from our acquisitions. Foreign exchange had a negative effect of approximately 5% to our European sales compared to last year.

Operating profit in North America was down $3.7 million as a result of increased operating expenses, which were partially offset by higher gross profits. Operating profit in Europe was down $200,000 compared to last year.

In total, the operating income from acquisitions nearly broke even. We continue to have a very strong financial position, which gives us flexibility and the capability to continue investing in our long-term strategy and return capital to shareholders.

I will now turn the call over to Karen to elaborate on our strategy. Karen?

Thanks, Tom, and good morning everyone. As I noted on our last quarterly call in January, we completed two acquisitions, CG Visions and Gbo Fastening Systems.

CG Visions is an established Indiana-based company providing BIM technology services and consultations to U.S. residential building industry.

BIM is Building Information Modeling. This acquisition enables Simpson Strong-Tie to build coaster partnerships with builders by offering software and services to help them control cost and increase efficiencies at all stages of the home-building process, including home design, estimations, selling and construction.

We introduced the CG Vision platform to our builder customers at the International Builders Show in mid-January and their initial feedback has been very positive. We are presenting the CG platform to various builders to showcase the software and determine which modules and services they might be interested in using to help support their business.

We also acquired Gbo Fastening Systems, one of Europe’s leading manufacturing of fastening solutions headquartered in Sweden. Gbo specializes in designing and manufacturing unique and innovative fastening solutions for structural applications and corrosive environments.

We have determined the required wood connector products for the Nordic region and have placed inventory in Sweden, our western European locations are working on sales and marketing plan for a complete fastener line and we will be ready to introduce it to their buying groups by year-end. In regard to our truss sales, although they were down slightly in Q1 due primarily to touch weather conditions in the west, our truss specialists continue to convert and train customers on our truss design and management software.

In Q1, we converted 15 small and medium size component manufacturers with an additional 12 scheduled for Q2. In late 2016, we were given the opportunity to put mechanical anchors in our Outdoor Accent program into The Home Depot.

As a result, a portion of our increase in finished goods inventory is due to a buildup of these products for this customer. The rollout will continue throughout the year.

Once complete expect this opportunity will meaningfully contribute to our concrete and DIY business lines going forward. In an effort to improve our operating efficiencies as well as ensure we are the most cost effective connector manufacturer, we announced in Q2 2016, that we would be moving some of our high volume production out of the Riverside, California plant to our other three connector manufacturing locations.

As of today, we are about 9 months ahead of schedule and can plan to complete this project by the end of third quarter 2017. Our goal is to have 75% utilization on two full shifts.

Our utilization began at 45%, we are currently tracking at 60%. In addition, our SAP implementation project to update our ERP system in an effort to improve business analytics, inventory management and purchasing is on track and on budget.

Our phased in rollout is schedule to begin Q1 2018. Before I turn the call over to Brian, I wanted to also comment on the results of our special meeting of shareholders held in March.

In response to our shareholder outreach program, the Board of Directors made significant changes to enhance both our corporate governance and executive compensation practices including the termination of our shareholder rights plan. These actions demonstrate our commitment to shareholder democracy and to be found in our proxy filing for the upcoming annual meeting of shareholders.

I’d now like to turn the call over to Brian who will discuss our first quarter financial results in detail.

Thank you, Karen. Our first quarter consolidated net sales of $219.9 million increased 10% compared to the $199.5 million in the first quarter of 2016.

Our recent acquisitions accounted for $12.6 million of this increase. Our consolidated gross margin of 46% was down slightly from Q1 last year.

The gross margin on wood products was 47% compared to 48% last year and for concrete products it was 32% in both Q1 of this year and last year. The wood product gross margin benefited from the price increase Tom mentioned earlier but was offset by lower gross margins at Gunnebo Fastening which had an impact of approximately a 150 basis points.

As noted in our earnings press release, we currently believe the estimated consolidated gross margin will be in the 45% to 46% range for the full year of 2017, slightly lower than our prior guidance due to lower gross margins from the acquisitions in total and somewhat effect on rise in material in North America. Total operating expenses, R&D and engineering, selling and general and administrative, as a percent of sales were up about 225 basis points in the quarter compared to last year due to a number of factors.

First, we recognize the $5.1 million increase in stock-based compensation expense due to a change in accelerated vesting provisions of the 2017 grants. As stock grants invest overtime, we expect the expense in subsequent quarters will be less as some of the charge was frontloaded in the first quarter.

In addition, we had increased personnel cost partly associated with the acquisitions as well as higher legal and professional fees as we work to deliver on our long term strategic initiatives such as new ERP and HR systems, corporate governance initiatives and compensation matters. The increased expenses were offset by lower cash profit sharing, a lower operating income and changes to our executive officer cash profit sharing plan.

Another item to note in the quarter was the non-operating income, bargain purchase gain of $8.4 million based on a preliminary purchase price allocation valuation. This was a result of acquiring the Gunnebo Fastening assets and liabilities at a purchase price less than their respective fair values.

The gain did not affect our income tax expense for the quarter although it did affect the tax rate. Our first quarter tax rate of 25% was down from 38% last year primarily due to that bargain purchase gain as well as the adoption of a new accounting standard on the treatment of windfall shortfall benefits on stock options and RSUs, which previously were recorded in equity.

As a result, we currently believe the annual effective tax rate for 2017 will be between 34% and 36%. The reduction from our prior guidance is related to the bargain purchase gain.

We used cash flow from operations of $11.8 million during the first quarter. Capital expenditures were approximately $16.1 million and were primarily related to the Texas facility expansion and for improvements in the new chemical facility.

We also invested in manufacturing equipment, software development and capitalized cost for the ERP project. For the full year of 2017, depreciation and amortization expense is expected to be in the range of $31 million to $33 million, of which $25 million to $26 million is pure depreciation.

Our full year 2017 CapEx is expected to be in the range of $50 million to $55 million and includes finishing the two facilities noted earlier and assumes all projects will be completed by the end of the year. On Monday, our Board of Directors declared a quarterly dividend of $0.21 per share payable in July representing a $0.03 per share increase.

We also have a Board authorized share repurchase program in place with a balance of about $71 million which expires at the end of 2017 and we did not repurchase any shares in the quarter. Before we turn it over to questions, I would like to remind you that if you like further information please contact Tom at the phone number listed on the press release.

Also look for our quarterly report on Form 10-Q to be filed in early May. We’d like to now open it up to your questions.

Good morning. Thanks for taking the questions.

Good morning, Dan.

Wanted to focus a little bit on the expense side, perhaps Brian can you quantify the year-over-year impact as it relates to G&A of the change in accounting for stock comp?

So, the accelerated vesting, Dan?

Correct.

Yes. So that was $5.1 million.

On a year-over-year basis?

Correct.

Got it. And when I look at apples-to-apples full year of 2017 versus 2016, what are your expectations for the differential for stock-comp?

It will be up a little bit, however, as I noted, the frontloading of that expense pulled lot of that charge into the first quarter. I don’t have the specifics on the year-over-year, however, it will be just I think slightly up over prior year.

Got it. Okay.

As it relates to R&D, spending a little bit more there, what type of return do you expect to generate on the incremental spend? And is there any tangible projects or benefits you can point to that you expect to achieve over the next few years?

Part of the incremental increase in R&D and engineering is related to acquisitions and the expenses that are associated with those. So, for example, in North America, we record the – the primary operating expenses of CD/Visions and R&D and engineering.

The other expenses associated with that are intangible amortization expense and that’s recorded in G&A for that particular acquisition. So I think a fair amount of that increase was associated with the recording of the acquisition expenses.

In R&D specifically, okay.

Right.

Got it. And then maybe one more and I know these are sort of mechanical, but just maybe help us understand the dynamics that led to recording the bargain purchase gain for Gunnebo?

Sure. So we acquired the group for $10.2 million and when our valuation experts looked at recording or evaluated the assets and liabilities which are primarily real estate, PP&E, inventory, accounts receivable and then payables, the fair value of the assets were $18 million.

So GAAP requires that the differentials in this case the $8 million differential is between what we paid and the fair value of the assets be recorded as the bargain purchase gain. As oppose to an acquisition that would have a purchase consideration in excess of the identified tangible or intangible assets, the differential in those cases is recorded in goodwill.

So Gunnebo there was no goodwill, there was the bargain purchase gain.

Got it. Appreciate it.

I will jump back in queue. Thank you very much.

You’re welcome.

Hey, everybody. Good morning.

Good morning, Tim.

Good morning.

Yes, happy Friday. So I guess just on the gross margin guidance, the 150 basis point reduction, could you just break out for us how much was raw materials and then how much was acquisitions and maybe why the acquisition keeps change because I think you guys had already acquired those by the time you gave guidance last quarter.

Right, so I would say estimated by two-thirds of that 150 basis points are associated with the acquisitions and the remainder related to the material. And I would say that the – as we are in the operations and getting more of the details to be able to project that for 2017, we’ve been able to fine-tune those numbers and that’s why we’ve got that differential today versus where we were providing guidance on last quarter’s call.

Okay. So is it the right way to think about maybe the acquisitions versus the core is that the acquisitions are maybe kind of low 20% gross margin and the core business is maybe down about 100 basis points year-over-year?

I think that’s a good way to think about it, yes.

Okay. And is there any way to think about just the cadence in price cost.

I know you mentioned some pricing improvements in the first quarter. Any way to talk about how much that was?

And then how should we think about pricing relative to inflation as we go through the year? Is there any quarter that is more impactful than others?

Hey, Tim, it’s Karen. As we mentioned, we put a price increase into effect December 01.

Typically we would see that most of that price increase would be taken by our customers through the first quarter. So I wouldn’t see any spikes or decreases in that.

Again, most of our customers have accepted their price increase as a function of cost of steel rising. So I think you would see that fairly consistent throughout the rest of the year.

Okay. And I think the price increase might have been something like 6%, is it fair to assume maybe half of that actually sticks?

Yes, the price increase was 6%, a little bit better than half of it sticks because again there is a phasing point as some of our customers are accepting things. So just to reiterate that price increase was on our connector sales, not the rest of our business but yes, they were 6% and again a little bit better than 50% of that has been accepted by the customers.

Okay. And then the Home Depot mechanical acre program, is there any way to maybe put some parameters about how much that might contribute to revenue just from a sizing perspective?

Yes, it’s a pretty significant program for us and we will be working the rest of this year to set those Home Depot stores. It has been – we have been able to work with Home Depot to put this in all of their locations.

So we would estimate on an annualized basis once we are all set that it could potentially be worth around $30 million.

Okay. It’s pretty sizeable.

And then just could you give us an idea of what the ERP cost that ran into the P&L in the first quarter? And does that cost ramp through the year?

Or is that a pretty good run rate?

I would say that it’s about $1 million in the quarter and because a lot of those costs, lot of the money that we’re spending is capitalized on the ERP implementation. So a bit went through the P&L but I would say about $1 million and I think that would be fairly consistent for this year, next year changes as we move more into training as oppose to configuration and training is an expense as oppose to configuration.

So…

Okay. And I guess maybe just more broadly, is it possible that EBIT – is your expectation that maybe EBIT is down this year on a year-over-year basis just given some of the dilution maybe from the acquisitions and then some of the higher spending?

I would think EBIT on a dollar basis will be up, EBIT margin would be down.

Okay. Okay, that’s helpful.

All right. Thanks guys.

Appreciate it.

Thanks you.

Thank you.

Thank you and good morning.

Good morning, Steve.

So, first, I had a question on the gain on bargain purchase, which I guess is reverse goodwill. Is this a new accounting standard?

Yeah, good question, Steve. And reverse goodwill that’s, I think, a good analogy.

It’s not new, it’s fairly rare. But I think it’s been a GAAP for seven, eight, nine years, something like that.

So it definitely is not the – you normally don’t see the – many transactions with a bargain purchase gain, but in our particular case it was that because of the purchase price in relation to the fair value of those assets. But it’s not usual, but it is GAAP and it’s been GAAP for like I said a number of years now.

Yeah, that’s interesting. Because it’s been around evidently, but I’ve seen it twice in two days and never heard of it before.

That’s an interesting comment too. One thing I would add though is that as – so we’ve recorded on the balance sheet the assets at fair value, so as I mentioned inventory receivables, real estate, fixed asset sales, $18 million, and as those assets are consumed whether through cost of sales or depreciation that bargain purchase gain, which is now sitting on the balance and the assets will then be depreciated or reflected in cost of sales over time.

So essentially it will come back through the P&L.

So, it will be depreciated, so it will diminish earnings without a cash flow hit?

Right, exactly.

Okay. Well, let me ask a question.

Why did you get a bargain? Was it sharp negotiating or was the vendor for some reason motivated?

We believe motivation. We’d like to think negotiation, but we are not 100% sure on the motivation of the seller, but we felt that when we were negotiating with them that this was a fair price to pay and we were ultimately able to come to an agreement with the seller.

Okay. Well, I hope it pans out well.

You indicated that on March 28 the board approved some governance changes, but on March 31st, some of your investors published a pretty detailed manifesto regarding the need for change. And I think they make some valid points.

So I just want to know what the level of engagement is and are we going to see more discipline and change forthcoming?

Hi Steve, this is Karen. Yeah, so as I’ve mentioned, we’ve been working on investor outreach for probably almost the past 18 months on things that we needed to do from both the governance side and a compensation side and I think you’ve certainly seen the actions that the board had taken and Brian and our – Pete Louras, the Chairman of our Board have been in communications with many of the governance areas within our investor teams.

And we are also looking at many aspects of our business to ensure that we are getting the most profitably that we can out of those, so looking closely at those, working directly with the board and looking at quite a few details as we continue to improve Simpson Strong-Tie.

Well, I hope I don’t sound mean, but, I mean, if I just looked at your IR page and you are still showing 2015 highlights and the level of outreach and engagement is still fairly minimal. So, I think, you’d get a free pass if you are crushing the numbers, but unfortunately you are not.

So, I guess, I’d just encourage you to take this seriously because it can really enhance shareholder value and then I will just get out of my [indiscernible]. Thank you.

Thank you.

Hi, Karen and Brian, how are you?

Hi, Steve [ph].

Thanks for taking my questions. So, we certainly appreciate the greater emphasis on ROIC in the compensation plan, that’s helpful, so we appreciate that.

But would that a plan to really increase ROIC through either operational improvements or capital efficiency with specific targets? I know you said you kind of working on something, but it seems kind of incomplete, so perhaps you could share some more details with respect to that.

Sure. Certainly as you seen in the comp, we have focused that on revenue growth as well as ROIC growth.

If you look at where our ROIC was for 2016, I think, you will see a significant increase over where it has been for the past few years and we are continuing to work on that through means of inventory returns, what we are doing from the standpoint of AR and putting the plan in place with our management team on how to improve in those particular areas.

Is there anything specific you could share in terms of either improvement in margins or cash flow that would be really helpful or maybe there is a day where you are going to unveil that to everyone? There is a lot of value here, so it’s – will be helpful to kind of see where you are going.

Right. And we will – I don’t have it to the point at today where I’d want to unveil it, but we will have that very soon to be able to give the investors what our targets are.

And methods to achieve those?

The targets timeframe and method to achieve them, correct.

Great. Thank you very much.

Thank you.

Thanks, Steve.

So thank you everyone for your comments and have a nice day.

Thanks very much.